Monetary Policy &Inflation by RBI

By: Karminder Kaur Mahek Chhabra

INDEX
1.Intoduction ..........................................................................................................................................3
1.1 Monetary Policy .............................................................................................................................................................. 3 1.1.1. Why it is needed? ................................................................................................................................................... 3 1.1.2. Instruments of monetary policy in india.................................................................................................................. 4 1.1.2.1. Quantitative Measures ........................................................................................................................................ 4 1.1.2.2. Qualitative Measures ........................................................................................................................................... 5 1.2 Inflation in India .............................................................................................................................................................. 7 1.2.1 Inflation .................................................................................................................................................................... 7 1.2.2 CPI and WPI .............................................................................................................................................................. 7 1.2.3 Stagflation ................................................................................................................................................................ 9 1.2.4 Disinflation ............................................................................................................................................................... 9 1.2.5 Deflation ................................................................................................................................................................... 9 1.2.6 Benefits and problems .............................................................................................................................................. 9 1.2.7 Managing Inflation ................................................................................................................................................. 10

2.Objective ............................................................................................................................................. 11 3.Monetary policy In India ............................................................................................................ 11

3.1 No change in Policy Rate ............................................................................................................................................... 12 3.2 Change in CRR ............................................................................................................................................................... 13 3.3 Increase in Repo rate .................................................................................................................................................... 13 3.4 Reduction iin SLR ........................................................................................................................................................... 14 3.5 Changes in REPO Rate ,WPI and CPI over the previous years ....................................................................................... 15

4. References......................................................................................................................................... 18

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1.INTRODUCTION

1.1 MONETARY POLICY:

Monetary policy is the management of money supply and interest rates by central banks to influence prices and employment. Monetary policy works through expansion or contraction of investment and consumption expenditure.

Monetary policy is the process by which the government, central bank (RBI in India), or monetary authority of a country controls (i) (ii) (iii) Supply of money Availability of money Cost of money or rate of interest, in order to attain a set of objectives oriented towards the growth and stability of the economy. Monetary theory provides insight into how to craft optimal monetary policy.

Monetary policy is referred to as either being an expansionary policy, or a contractionary policy, where an expansionary policy increases the total supply of money in the economy, and a contractionary policy decreases the total money supply. Expansionary policy is traditionally used to combat unemployment in a recession by lowering interest rates, while contractionary policy involves raising interest rates in order to combat inflation. Monetary policy is contrasted with fiscal policy, which refers to government borrowing, spending and taxation. 1.1.1 WHY IT IS NEEDED? With the help of the monetary policy the central bank (RBI) controls the total supply of money in the market. With the control over the money supply the central bank could control the spending by various people and institutions thus controlling the prices and the economic output. What monetary policy at its best can deliver is low and stable inflation, and thereby reduces the volatility of the business cycle. When inflationary pressures build up, it is monetary policy only which raises the short-term interest rate (the policy rate), which raises real rates across the economy and squeezes consumption and investment. Monetary policy in India underwent significant changes in the 1990s as the Indian Economy became increasing open and financial sector reforms were put in place. Reforms during the 1990s enhanced the sensitivity of price signals from the central bank, making interest rates the increasingly Dominant transmission channel of monetary policy in India.

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1.1.2 INSTRUMENTS OF MONETARY POLICY IN INDIA The various instruments of monetary policy that the RBI has and can use are:

1.1.2.1 QUANTITATIVE MEASURES These methods are called traditional methods because they have been in use for decades. Through these methods, the credit creation is controlled by changing the cash reserves of commercial banks. The methods of Bank Rate Policy, open market operations and variation of Cash Reserve Ratios, etc., are designed to effect the lendable resources of commercial banks either directly affecting their reserve base or by making the cost of funds cheaper or dearer to them. The important methods of this nature are explained herein below: i. Open Market operations: Here, the RBI enters into sale and purchase of government securities and treasury bills. So the RBI can pump money into circulation by buying back the securities and vice versa. Policy rates (i) Bank rate and repo rate: Bank rate is the rate of interest that commercial banks and other financial intermediaries have to pay on the loan that they take from countrys central or federal bank. Repo rate is similar to bank rate except that it is applicable to short term loans while bank rate is applicable to long term loans. In India Reserve Bank of India (RBI) is central bank. Suppose that bank rate in India is 5% which means that if a commercial bank takes a loan of 1 million rupees from central bank then it has pay 5% of 1 million i.e. Rs. 50,000 as the interest. (ii) Reverse repo rate: Reverse repo rate is the counterpart of repo rate. It is the rate of interest commercial banks and other financial intermediaries receive on excess funds they deposit with the central bank. Now suppose the commercial bank deposits 1 million rupees in central bank with reverse repo rate being 5% then the commercial bank will receive Rs. 50,000 as interest on their deposit. Reserve ratios Reserve ratios put a limit on the minimum amount of reserve that commercial banks and other financial intermediaries are required to keep in central bank. (i) Cash Reserve Ratio: CRR is the percentage of their total deposits that the commercial banks have to keep in central bank inform of cash. (ii) Statutory Liquidity Ratio: SLR is similar to CRR except that apart from cash other liquid assets like precious metals such as gold and approved short term securities like treasury bills may be used to meet the reserve requirements.

ii.

iii.

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1.1.2.2 QUALITATIVE MEASURES The selective or qualitative credit control is intended to ensure an adequate credit flow to the desired sectors and preventing excessive credit for less essential economic activities. The RBI issues directives under Section 21 of the Banking Regulation Act 1949, to regulate the flow of banks' credit against the security of selected commodities. It is usually applied to control the credit provided by the banks against certain essential commodities which may otherwise lead to traders using the credit facilities for hoarding and black marketing and thereby permitting spiraling prices of these commodities. The selective credit control measures by RBI are resorted to commodities like, wheat, sugar, oilseeds, etc. The RBI adopts a number of credit control methods from time to time. The important methods are given here under. i. Fixation of Margin Requirements Here the term "margin "refers to a portion of the loan amount which cannot be borrowed from bank. In other words, the margin money is required to be brought in by the borrower from his own sources. This much percentage of money will not be lent by banks. The RBI lowers the margin to expand the credit and raises margin to contract or control the credit for stock market operations. ii. Regulation of Consumer Credit The credit facilities provided by the banks to purchase durable consumer goods like cars, refrigerators, T.V. furniture, etc. is called as consumer credit. If consumer credit is expanded, it leads to the increase in production of consumer goods in the country. Such increased sale of consumer goods will affect savings of people and capital formation in the economy. Hence, RBI may control the consumer credit extended by the commercial banks. These days RBI does not use such credit control measure as increased consumption lead to more economic activity. iii. Control through Directives The Reserve Bank of India (Amendment) Act and the Banking Companies Act has empowered the RBI to issue directives to a particular bank or to the banks in general in regard to the following: The purpose for which advances may or may not be made, the maximum amount of advances that can be granted to any individual, firm or company; the margins to be maintained on secured loans, and the rate of interest to be charged, etc. iv. Rationing of Credit This method is used to control the scheduled banks borrowings from the RBI. The RBI shows differential treatment in giving financial help to its member banks
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according to the purpose for which the credit is used.This is done by framing different eligibility rules for various kinds of paper, as well as offering differential rates of rediscount on different kinds of bills offered for rediscount. The RBI prescribed a lower rate of interest on advances to sectors like export trade, small scale industries and agriculture. Higher rate of interest was fixed for general loans. v. Moral Suasion Moral suasion is a means of strengthening mutual confidence an understanding between the monetary authority and the banks as well as financial institute and, therefore, is an essential instrument of monetary regulation. Either by holding meetings or by circular letters the Governor of the RBI is persuading the banks to follow a particular line of action. In certain times a mere statement or speech by a top executive of RBI does this function. vi. Direct Action When the moral suasion proves ineffective the RBI may have to use direct action on banks. The RBI is empowered to take certain penal actions against banks which do not follow the line of policy dictated by it. The banks in default will be made to suffer by way of the following: Levying penal interest rates on the defaulting banks. Cancelling the licenses of such banks ( extreme step) Refusing to grant refinance facilities to such banks Putting lending restrictions on the banks. Not permitting opening of new branches for the banks. Not allowing participation in money market, etc.

This method is essentially a corrective measure which may bring about some psychological pressure on the commercial banks to follow the RBI instructions.

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1.2 INFLATION IN INDIAN ECONOMY 1.2.1 INFLATION Since India has been witnessing unprecedented rise in inflation rates which has burnt a hole in tax payers pocket one may be curious to know about inflation in greater depth. Put in simple terms inflation indicates the rise in general price level of goods and services in an economy. If price of goods and services increases then naturally the buying power of money will decrease as one can buy fewer goods and services with each unit of currency. Let us take an example suppose one week earlier you went to have breakfast in a nearby restaurant and you have taken a 50 rupee note with you. If the price a piece of sandwich was Rs. 10 price then with you could buy 5 sandwich pieces. Now over the week the prices of bread and vegetables have gone up on account of inflation and as a result the restaurant has increased the price of a piece of sandwich to Rs.12.5. Now if you can only buy 4 sandwich pieces with the same 50 rupee note today. 1.2.2 CPI and WPI Now you may be thinking as to how one can measure inflation. The answer to your question is inflation rate, the measure of rise in price level of goods and services. It indicates the rate of rise in price level of goods and services. Given the large number of goods and services produced in an economy it is not feasible to calculate the average change in price level of all goods and services. Consequently a representative basket of goods and services (also known as market basket) is used for which the change in price is calculated to get an indicative figure of change in price level, which is called inflation rate. Mathematically inflation rate is calculated as the percentage rate of change of a certain price index. Generally each commodity in the market basket is linked to an index and the index has a certain value (usually 100) in a particular year known as base year which is proportional to the price of commodity. This index value keeps changing with time in proportion to change in price of commodity. The index for market basket is calculated as the weighted average of the individual index of commodities where each commodity has been assigned a particular weight based on its influence in economy. The index for market basket is used for calculation of inflation rate. If the index values for the beginning and end of year are known then the inflation rate for year is the percentage change in index value for year. The measurement process will become clearer with a simple example that is being provided here. Let us consider the market basket has only one product say rice. Assume the base year for index to be 2000 and corresponding index value to be 100. Let the price of sugar in base year is Rs. 5. Now suppose we want to calculate the inflation rate for year 2009. For this as mentioned earlier we need to calculate the index values at beginning and end of year 2009 which can be done using the price of sugar on the corresponding date. Let the price of sugar at beginning and end of year 2009 be Rs. 6 and Rs.6.50 respectively. Applying unitary method the index value at the beginning and end of year 2009 is 120 and 125 respectively. Since the percentage increase in index value over the year 2009 is 4.17% so inflation rate for year 2009 is 4.17%.In above paragraph we illustrated the calculation of inflation rate for a year but you must have come across newspaper articles reporting Inflation rate for month ending
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December 31, 2010 was 8.43%. So now one needs to understand the meaning of the above mentioned statement. The statement also mentions the inflation rate on a yearly basis only and for calculating the inflation rate the index values on December 31, 2009 and December 31, 2010 are considered. The percentage change in index values for the period between December31, 2009 and December 31, 2010 gives the required inflation rate. If this inflation rate keeps increasing over a period of time then it is said that the economy is facing inflation. Based upon the type of price of commodity being considered for the calculation of index there are two types of indexes

Consumer Price Index (CPI) and Wholesale Price Index (WPI). WPI accounts for price change at the wholesaler whereas CPI measures the change in consumer price level and retail margins. It is important to note that the composition of market basket for the two indexes is also different. The market basket for CPI is determined and maintained by United States Bureau of Labor Statistics. Another minor point of difference between the two indexes is that WPI is generally calculated and reported on a weekly basis while CPI follows a monthly calculation and reporting procedure. At present most of the countries including USA, UK, Japan and China use CPI for inflation rate calculation. However India follows WPI method for inflation calculation. The market basket of WPI consists of 435 commodities which are grouped into three categories: 1. Primary Articles: consist of food grains, fruits and vegetables, milk, eggs, meats and fishes, condiments and spices, fibers, oil seeds and minerals. Their weight age is 22.02 %. 2. Fuel, Power, Light & Lubricants: consist of coal and petroleum related products, lubricants, electricity etc. Their weight age is 14.23%. 3. Manufactured Products: consist of dairy products, atta, biscuits, edible oils, liquors, cloth, toothpaste, batteries, automobiles etc. Their weight age is 63.75%. The current base year in India for WPI is 2004-05 and base index value is 100.The current base year in India for CPI is 2010 and base index value is 100. However there is on-going debate on increasing the number of commodities in market basket to 980. However India does not follow the normal weekly reporting period for WPI and instead reports the inflation rate on a monthly basis. The inflation rate calculation procedure remains same for both the indexes. However there are four types of Consumer price indexes which are mentioned below: 1. CPI Industrial Workers; 2. CPI Urban Non-Manual Employees; 3. CPI Agricultural labourers; 4. CPI Rural labour

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1.2.3 STAGFLATION When inflation is accompanied by an increase in unemployment rate then the situation is called stagflation. The term stagflation is combination of two terms stagnation and inflation. Stagnation here refers to economic stagnation which means a slowdown in economic growth as indicated by increase in unemployment rate.

1.2.4 DISINFLATION The counterpart of inflation is disinflation which is the case of decrease in inflation rate over a period of time. This means that rate of increase in price level of goods and services has slowed down over the time period. 1.2.5 DEFLATION If the decrease in inflation rate continues then the rate may become negative, a situation referred as deflation. During deflation the price level of goods and services decreases and consequently the purchasing power of money increase. This means that one can buy more amount of a given commodity with the same amount of money. Referring to the sandwich example given above now let us suppose that the price of a piece of sandwich has dropped to Rs. 5 and so now you can buy 10 sandwich pieces for Rs. 50 1.2.6 BENEFITS AND PROBLEM

Benefits

Businesses and investors with large amounts of money tend to invest in assets to avoid the losses caused by inflation. As the inflation of prices results in an increase in the value of investments, such as real estate or stocks, investors are able to preserve the value of their wealth even as the price of currency falls. Thus, small inflation rates encourage investment while discouraging the hoarding of money. Inflation also decreases the value of bank loans, easing the burden of homeowners and students.

Problems

Although inflation can encourage investment, increased investment can lead to speculation and mismanagement of hedge funds and brokerage firms. It also increases the price of exports, causing other countries to look elsewhere for cheaper deals. On the other hand, a devalued currency means that imports become more expensive; the rise in prices of imported goods leads to even higher inflation. Fixed and low-income families generally can't keep up with rising prices, damaging their standard of living.

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1.2.7 MANAGING INFLATION: Although generally associated with decreasing currency values, inflation is an economic term used to describe a rising cost of goods and services. Rapid supply or demand changes and government monetary policies are the two most cited causes for inflation. Inflation can have positive effects for an economy, but disastrous long-term effects if left unchecked. Thus, controlling inflation makes up a key component of national monetary policies. Managing Inflation

To enjoy the benefits of inflation without suffering too many ill effects, governments try to maintain a low level of inflation, typically below 5 percent. A government's central banks can help moderate inflation by regulating interest and lending rates. Higher interest rates reduce the money supply and slow inflation. Alternately, governments can fix wages or the costs of goods in order to prevent prices from rapidly rising. Other methods involve manipulating the supply and demands of goods through import and export regulations.

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2. OBJECTIVE The main of objective of this study is to understand how monetary policy helps to control inflation in Indian economy. With the help of statistics of previous years, one comes to know how RBI has successfully managed to control the inflation by varying its policy rates and reserve ratios. What steps does RBI take according to the rate of employment and inflation prevailing in the Indian economy and various risk factors associated with it. 3. MONETARY POLICY BEHAVIOUR IN INDIA The Reserve Bank of India published its Staff Study SS (DEAP): 2/2010 entitled Monetary Policy Behaviour in India: Evidence from Taylor-Type Policy Frameworks. The Staff Study, authored by Bhupal Singh, examines the response of monetary policy in India to inflation and output gap in the framework of Taylor rule. Taylor rule, proposed by John B. Taylor in 1993, is a monetary-policy rule that specifies how much the central bank should change the nominal interest rate in response to divergences of actual inflation rates from the target inflation rates and of actual output from the potential output. A large part of the discussion of monetary policy on the Taylor rule relates to how the monetary policy should be conducted and how far the actual conduct of policy deviates from the rule-based parameters. The accommodative monetary policies globally after the recession of the early 2000s rates for too long has been in violation of the Taylor rule. Contextually, the key motivation for this study is to understand the shifts in the relative weights that the monetary policy in India might have accorded to deviations in inflation and output the key objectives of monetary policy. The study examines the interest rate path suggested by simple monetary policy rules in India. The relevance of such rules is that an analysis of what a rule-based monetary policy would suggest, can serve as a valuable guide for the exercise of discretion by the policy makers. The reaction function has been estimated using ordinary least squares or instrumental variables in case of backward looking functions and using generalised method of moments in case of forward looking rules, as is the practice in standard empirical literature. In addition to the study also analyses monetary policy stance in India in a structural VAR model with output gap, inflation gap and policy interest rate. The structural VAR model has been used to calibrate the findings emerging from the static models. A range of estimated models for Taylor rule in India in a historical perspective suggest that while the monetary policy appeared more responsive to the output gap than to the inflation gap during the period 1950-51 to 1987-88, there is a shift in policy response during the period 1988-89-2008-09 with relatively strong reaction to inflation gap than to the output gap. There is also evidence of more than proportional response of monetary policy to inflation gap in the latter period. The size of the coefficient of inflation gap has also increased significantly over time, which suggests a shift in the emphasis of monetary policy towards inflation concerns. An important difference in the interest rate smoothing behaviour of the central bank is a shift from large smoothing of short-term interest rates towards the rates recommended by Taylor rule in the earlier period to relatively gradual adjustment of short-term interest rates in the latter period. This is consistent with the measured actions of central bank given the
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uncertainties surrounding the economic environment and the transmission of policy rates. The estimates from a structural VAR framework also firmly establish that variations in the shortterm interest rates are driven more by the inflation gap than the output gap. RBI takes step according to the rate of employment and inflation prevailing in the Indian economy . 3.1 NO CHANGE IN POLICY RATE : In the press release of 27th july,2010 by RBI Measures: The repo rate increased from 5.5 per cent to 5.75 per cent and the reverse repo rate from 4 per cent to 4.50 per cent. This asymmetric raise in rates narrows the LAF corridor from 150 basis points to 125 basis points. Reasons: The Reserve Bank began the reversal of its expansionary monetary policy in October 2009 and has calibrated the exit to Indias specific growth-inflation dynamics. Inflation: The developments on the inflation front are, however, worrisome. i. WPI inflation has been in double digits since February 2010. Primary food articles inflation, despite some moderation, continues to be in double digits. Between November 2009 and June 2010, non-food inflation rose from zero to 10.6 per cent and non-food manufactured inflation from zero to 7.3 per cent. Significantly, non-food items contributed over 70 per cent to WPI inflation in June 2010, suggesting that inflation is now very much generalised. Inflation in terms of all four consumer price indices remains in double digits notwithstanding some decline in recent months. Going forward, the outlook on inflation will be shaped by: (i) (ii) (iii) the monsoon performance for the remaining period; movements in global energy and commodity prices, which have been showing distinct signs of softening over the past few weeks; and potential build-up in demand-side pressures with the strengthening of domestic growth drivers.

ii.

Risk Factors Softening of inflation in the months ahead is contingent on moderation of food prices which in turn will depend on a balanced spatial and temporal distribution of rainfall in the remaining period of this monsoon season.

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Monetary policy actions are expected to: i) Moderate inflation by reining in demand pressures and inflationary expectations. ii) Maintain financial conditions conducive to sustaining growth. iii) Generate liquidity conditions consistent with more effective transmission of policy actions. iv) Restrict the volatility of short-term rates to a narrower corridor. 3.2. CHANGE IN CRR : In the press release of 15th march,2012 by RBI Monetary and Liquidity Measures The Reserve Bank reduced the CRR by 75 basis points from 5.5 per cent to 4.75 per cent effective March 10, 2012. Reason: This measure was necessitated ahead of this scheduled Mid-Quarter Review to address the persistent structural liquidity deficit beyond the Reserve Banks comfort level, which would have further worsened during the week of March 12-16 due to advance tax outflows Inflation: i. After remaining above 9 per cent during April-November 2011, y-o-y headline wholesale price index (WPI) inflation rate moderated to 7.7 per cent in December and further to 6.6 per cent in January 2012, before rising to 7.0 per cent in February. While moderation in WPI inflation stemmed mainly from primary food articles, fuel and manufactured products groups also contributed. ii. Notably, Consumer Price Index (CPI) inflation (as measured by the new series, base year 2010) for the month of January 2012 was 7.7 per cent suggesting that price pressures persist at the retail level.

3.3 INCREASE IN REPO RATE : In the press release of 16th Sep,2011 by RBI Monetary Measures On the basis of the current macroeconomic assessment, it has been decided to:

increase the policy repo rate under the liquidity adjustment facility (LAF) by 25 basis points from 8.0 per cent to 8.25 per cent with immediate effect.

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Consequent to the above increase in the repo rate, the reverse repo rate under the LAF will stand automatically adjusted to 7.25 per cent and the marginal standing facility (MSF) rate to 9.25 per cent with immediate effect. Reason: Since the Reserve Banks First Quarter Review of July 26, the global macroeconomic outlook has worsened. There is growing consensus that sluggishness will persist longer than earlier expected. Concerns over the sovereign debt problem in the euro area have added further uncertainty to the prospects of recovery. Domestically, even as many indicators point to moderating growth, both headline and non-food manufactured products inflation are at uncomfortably high levels. Crude oil prices remain high. Food price inflation persists notwithstanding a normal monsoon. Inflationary pressures are expected to ease towards the later part of 2011-12. Stabilisation of energy prices and moderating domestic demand should facilitate this process. However, in the current scenario, with the likelihood of inflation remaining high for the next few months, rising inflationary expectations remain a key risk. This makes it imperative to persevere with the current anti-inflationary stance. Inflation:Headline year-on-year wholesale price index (WPI) inflation rose from 9.2 per cent in July to 9.8 per cent in August 2011.

3.4. REDUCTION IN SLR : In the press release of 16th Dec,2010 by RBI Liquidity Measures It has been decided to:

first, reduce the statutory liquidity ratio (SLR) of scheduled commercial banks (SCBs) from 25 per cent of their NDTL to 24 per cent with effect from December 18, 2010; second, conduct open market operation (OMO) auctions for purchase of government securities for an aggregate amount of` 48,000 crore in the next one month, the schedule for which is being issued separately. The above two measures are expected to inject liquidity on an enduring basis of the order of ` 48,000 crore.

Reason: Inflation: i. After remaining in double digits for five successive months, year-on-year headline WPI inflation declined to 8.8 per cent in August 2010 and further to 7.5 per cent in November 2010. Consumer price (CPI) inflation for industrial workers and rural/agricultural labourers softened to single digit rates from August 2010, after remaining in double-digits for over a year. Though inflation has moderated, inflationary pressures persist both from domestic demand and higher global commodity prices. The pace of decline in

ii.

iii.
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food price inflation has been slower than expected due largely to structural factors. There is a risk that rising international commodity prices will spill over into domestic inflation. Going forward, rising domestic input costs for the manufacturing sector combined with aggregate demand pressures could weigh on domestic inflation. The risk to the Reserve Banks projection of 5.5 per cent inflation by March 2011 is on the upside. 3.5 CHANGES IN REPO RATE OVER THE PREVIOUS YEARS This graph shows the changes in repo rate over the past years. Similarly reverse repo rate have been changed accordingly. Effective date represents the date on which repo rate has been changed.

Effective Date Feb-10 Mar-10 Apr-10 Jul-10 Sep-10 Nov-10 Jan-11 May-11 Jun-11 Jul-11 Sep-11 Oct-11 Aug-12

Repo Rate 5 5.25 5.5 5.75 6 6.25 6.5 6.75 7.5 8 8.25 8.5 8

Repo Rate (%)

9 8 7 6 5 4 3 2 1 0 Oct/10 Aug/10 Aug/11 Oct/11

Repo Rate

Jun/10

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Aug/12

Jun/11

Feb/10

Feb/11

Dec/10

Dec/11

Feb/12

Apr/11

Apr/10

Apr/12

Jun/12

CHANGES IN CRR OVER THE PREVIOUS YEARS Effective Date Jan-09 Feb-10 Mar-10 Apr-10 Jan-12 Mar-12 Aug-12 CRR 5 5.5 5.75 6 5.5 4.75 4.75

CRR
7 6.5 6 5.5 5 4.5 4 Oct/09 Oct/10 Oct/11 Jan/09 Jan/10 Jan/11 Jan/12 Jul/09 Jul/10 Jul/11 CRR

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Apr/12

Apr/09

Apr/10

Apr/11

Jul/12

WPI INFLATION IN PREVIOUS YEARS (all commodities) YEAR Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 WPI Inflation (%) 9.36 9.78 10 9.87 9.46 7.74 7.23 7.56 7.69 7.5 7.55 7.25 6.87

WPI Inflation (%)

12 10 8 6 4 2 0 WPI Inflation (%)

Oct/11

Jan/12

Mar/12

Aug/11

Jun/12

Jul/11

Nov/11

Feb/12

Sep/11

From the graphs, we can conclude that WPI inflation varies more frequently but changes done in policy rates and reserve ratios have not been so frequent. This is because of growth inflation dynamics and risk factors associated with it. In January 2012 CRR was 5.5 and in March 2012 it was decreased to 4.75.The decrease in CRR will supply crores in market. It boosts the supply side and it reduces inflation. In January 2012 inflation was prevailing at 7.23 and the effect of CRR on inflation is evident in July 2012. Inflation came down to 6.87% in July 2012.

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May/12

Dec/11

Apr/12

Jul/12

4. REFERENCES: http://www.preservearticles.com/201103144496/qualitative-measures-of-monetarypolicy.html http://www.rbi.org.in/home.aspx http://dbie.rbi.org.in/DBIE/dbie.rbi?site=home http://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=22575 http://blog.karthiksankar.com/moneycreation/ http://www.scribd.com/doc/22357274/monetary-policy-of-india-and-its-effects

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